Goldman Sachs: U.S. stocks’ third-quarter earnings remain strong, while AI investment and earnings growth are nearing their peaks

Why does Goldman Sachs still see growth slowing despite strong third-quarter earnings?

As of the report’s publication, about 60% of S&P 500 companies had reported results. The third-quarter year-over-year growth rate in index earnings per share tracked by Goldman Sachs was 33%, unchanged from the second quarter after excluding one-off items. This was above the median of 10% over the past decade, but marked the end of the acceleration seen in recent quarters.
Earnings growth at the median company also fell from 14% in the second quarter to 12% in the third. Information technology and communication services together accounted for more than 60% of the index’s third-quarter earnings growth, with energy contributing a further roughly 20%; overall, high growth remains concentrated.
Among companies that had reported results, 60% posted earnings per share more than one standard deviation above analysts’ consensus, higher than the historical average of 50% but below the 64% average of the previous four quarters. Goldman Sachs expects the index’s full-year earnings growth, excluding one-off items, to decline from nearly 30% in 2026 to 18% in 2027.

Since the start of earnings season, analysts have raised their consensus forecast for S&P 500 companies’ 2027 earnings per share by 2%; however, the advantage of companies with upward revisions over those with downward revisions has narrowed, and only about half of sectors still have net upward revisions.
For companies that reported third-quarter results, analysts generally raised their 2027 sales forecasts but lowered their margin forecasts. Higher energy prices and pressure from input costs are offsetting some of the margin gains from improved revenue.

Analysts expect capital spending by large cloud providers to reach about 800 billion dollars in 2026, up 96% year over year, and about 1.2 trillion dollars in 2027, up 44%. Forecasts have been broadly stable this earnings season, unlike the steady upward revisions in recent quarters. On this basis, Goldman Sachs concludes that spending will still rise substantially, but its growth rate and the scale of forecast upgrades are passing their peaks.
Third-quarter earnings for AI infrastructure-related stocks are expected to grow 80% year over year, compared with about 15% for the rest of S&P 500 companies over the same period. Market consensus expects the former group’s growth to fall to about 40% by the end of 2027. A slowdown in investment growth therefore also matters for earnings growth at these companies directly involved in building out AI.
Large-scale investment has already weighed on cash flow: Amazon, Alphabet, Meta, Microsoft and Oracle together posted negative free cash flow of 31 billion dollars in the third quarter, as capital spending exceeded operating cash flow. Analysts expect the group’s free cash flow to fall further in 2027 and turn positive in 2028.

Cloud revenue at Amazon, Alphabet and Microsoft combined grew 54% year over year in the third quarter, up from 48% in the second quarter, signaling stronger indications of returns on AI investment. Cloud revenue exceeded analysts’ consensus, but investor expectations were higher ahead of the results and hedge fund positions were concentrated; meanwhile, cloud backlogs continued to grow, with growth slowing slightly from the second quarter.
This earnings season, S&P 500 stocks that beat earnings expectations had median next-day excess returns of 1.52 percentage points relative to the index; TMT stocks overall did not receive a similar reward even when earnings beat expectations. Goldman Sachs also noted renewed investor focus on AI’s impact on existing businesses, including disappointing Alphabet search revenue and a decline in search-driven traffic to Reddit.

Since the start of the third-quarter earnings season, 70% of S&P 500 constituents have risen, but these companies account for only 50% of the index’s market capitalization. Over the same period, the S&P 500 fell 3%, while the index excluding AI-related stocks rose 5%. Goldman Sachs believes declines in heavyweight technology stocks and gains among other stocks have both contributed to improving market breadth.
Goldman Sachs believes the future direction of energy prices and interest rates will be key factors in whether gains in non-technology sectors can continue.